President Obama needs more decisiveness in dealing with bank execs

Today, President Obama met with the CEOs of 15 major banks at the White House to encourage cooperation with the administration’s new plan to free up the credit and lending markets. The bank executives appear optimistic about the initial proposal but would also like further details.

Apparently, the plan to partner with private investors, the Federal Reserve and the FDIC to buy as much as $1 trillion in toxic assets from the banks to encourage lending is still on the table. As mentioned before, can we really trust the same banks whose dealings led to those toxic assets with that amount of capital, while simply HOPING the plan will free up lending but not actually require it? Or will even $1 trillion not be enough to cover all of the toxic assets, in which case the lending crisis will remain as it is now, only with more accumulation to the national debt?

Although the President should definitely make overtures to bank executives to encourage their cooperation in an economic recovery plan, the President also has considerable leverage in the matter and should not be afraid to use it if absolutely necessary – but hopefully the mere possibility of such action would convince banks to accept an alternative solution. Since most, if not all, of the major banks are members of the FDIC, the Federal Deposit Insurance Act allows the FDIC to step in and assume control of those institutions under certain conditions, including “unsafe or unsound condition” and “losses”. If the FDIC were to assume control of the banks, those toxic assets could be renegotiated, with a corresponding loss of economic income and prestige to both the banks and their counterparties in the toxic assets.

However, it is not in the best interest of the economy at large or the banks for the FDIC to take such initiative. But it should be sufficient incentive for the banks to accept an alternative plan to the outright purchase of the toxic assets by the government and private investors: no-interest loans provided by the Treasury and Federal Reserve to the banks UNDER THE WRITTEN CONDITION THAT THOSE FUNDS BE USED IN EXTENDING LOANS TO PRIVATE BUSINESSES. A written agreement will prevent another AIG scandal, as the bank executives would be criminally liable if the conditions of the agreement were broken. And even though the banks would still hold the toxic assets, they would benefit from the interest earned on the business loans, while the counterparties in the toxic assets wouldn’t be paid immediately but also would not see the assets diminish in value as a result of FDIC action. Finally, the government would benefit not only from the economic stimulation of loans to businesses, but also by not holding onto those toxic assets and eventually being repaid by the banks to minimize the impact on the national debt.

President Obama is taking the correct approach in being diplomatic with the bank executives and soliciting their cooperation in the economic recovery plan. But he also needs to keep in mind the leverage he has in this particular situation, and use that to his advantage in putting forth a plan which will first and foremost stimulate the economy while also allowing the banks to gradually eliminate their toxic assets. This plan will also allow the Congress time to debate and establish the new regulatory measures before all the toxic assets are removed and the wheeling and dealing begins with renewed vigor.

After all, if the President is willing to spend upwards of $1 trillion in the HOPE that banks will begin lending again, why not spend less than that amount in a plan which ENSURES that the money go towards stimulating the economy?